Asset and Wealth Protection

a blog by attorneys for individuals and businesses

International Issues in Estate Planning: One Will or Two?

Individuals and couples with assets in more than one country need to ensure that their estate planning documents are valid in all the jurisdictions in which they have property. Although in some instances this may be accomplished by means of one set of documents, in most cases having separate wills for the U.S. and the foreign assets is preferred.

International estate planning and administration

The laws of different jurisdictions often conflict, and a will that is perfectly acceptable in one country may be held invalid in another. Following are just a few issues that arise when dealing with the administration of an estate of someone who owned property in more than one country:

Will formalities. Even when the intent of the testator is clear, if the overseas jurisdiction where the foreign property is located has different drafting and execution requirements, a U.S. will may not be accepted. Are two witnesses sufficient? Is an attorney or notary certification required? Are holographic (handwritten) wills, nuncupative (oral) wills, and digital wills deemed valid in the foreign jurisdiction? Even a perfectly clear and valid U.S. will may not pass muster in another country, so it is crucial to ensure that the will satisfies the inheritance laws of the country where each property is located.

Invalid document or provisions. Many countries do not utilize living or testamentary trusts, and a judge in another country may refuse to acknowledge them. In some cases, opinion letters and affidavits may be accepted, but this could result in a very complicated administration and add significant costs to the proceedings. Other provisions may simply not be popular in another country because of adverse income tax consequences.

Forced heirship. A number of countries (including France, Spain, Italy, Japan and Saudi Arabia) mandate forced heirship or forced share, meaning that regardless of what you have designated in your will, specific beneficiaries (e.g., your spouse and/or children) are entitled to a portion of your assets.

Foreign language. If English is not the official language of the foreign jurisdiction, a will must usually be translated into the official language of that country when submitted to probate. This could be costly, and there is still no guarantee that the translated will’s provisions will be accepted by the foreign court. The Washington Convention of October 26, 1973 was intended to create the framework for international wills, to be used in several countries. However, very few countries have ratified it and the U.S. is not among them.

Estate planning and international tax attorneys

Estate planning is more than just a document noting who is to inherit your property. Issues concerning inheritance and taxation can get extremely complicated, especially when cross border issues come into play. If you have assets in more than one country, you need a law firm that can:

  • Advise on inheritance tax and cross-border issues, including those related to conflicts of law, succession and domicile
  • Obtain property valuations in the U.S. and abroad
  • Prepare U.S. wills and trusts, and coordinate with estate planning and tax attorneys in the jurisdiction(s) where the foreign assets are located
  • Coordinate the probate or other administration of U.S. and foreign estates
  • Arrange for the preparation of affidavits or opinion letters on U.S. or foreign estates law
  • Handle the transfer and/or repatriation of sale proceeds of inherited foreign property

To learn more about how you can arrange your estate to ensure your intended distribution and minimize taxes, contact the estate planning and tax attorneys at Moskowitz, LLP today.

Estate Planning Benefits of Conservation Easements

One of the biggest advantages of donating a conservation easement is that it can significantly reduce the donor’s estate tax burden and keep land in the family.

Reducing estate taxes through a conservation easement

The estate tax rate in 2017 is set at 40% for estates valued at over $5.49 million. Where estate taxes are high, heirs to significant land often need to sell part of all of the property to pay these taxes. This can be particularly challenging to families that own and/or operate ranches, farms, vineyards and forest land. A conservation easement can reduce that estate tax burden by reducing the value of the land and by excluding a percentage of the land’s value from the donor’s taxable estate.

Reducing the value of the land

As noted in our post on the federal income tax benefits of conservation easements, following the donation of an easement a property will usually decrease in value. A conservation easement makes the property worth only its preserved value as subject to the easement restrictions – that value no longer includes the land’s potential development value. This alone often brings a donor’s estate to an amount below the estate tax threshold.

Excluding 40% of the value of the land from the donor’s taxable estate

26 U.S. Code § 2055(f) authorizes an estate tax deduction for the value of a qualifying conservation easement donated to a land trust or other public charity. Under 26 U.S. Code § 2031(c), 40% of the land value of a property subject to a conservation easement may be excluded from the owner’s estate on the estate tax return, up to a maximum of $500,000. This cap is reduced by two percentage points for each percentage (or fraction thereof) of the value of the easement if the donation of the easement reduced the value of the land by less than 30%.

To qualify for the exclusion, the easement must serve a “conservation purpose” as defined in 26 U.S. Code §170(h)(4)(a). For example:

  • The land is preserved for use as an outdoor recreation area or for education of the general public,
  • The easement protects the natural habitat of fish, wildlife, or plants (or a similar ecosystem),
  • The easement preserves open space (including farmland and forest land) that will yield a significant public benefit and is for the scenic enjoyment of the general public, or is established pursuant to a clearly delineated Federal, State, or local governmental conservation policy, OR
  • The easement preserves an historically important land area or a certified historic structure.

Note that only members of the donor’s family can claim this exclusion, and the land must have been owned by the donor and/or their family for three years prior to the donor’s death.

Posthumous conservation easements

Conservation easements may be donated during a landowner’s lifetime, via a will, or posthumously by the owner’s heirs after the donor’s death. If the heirs decide to make a post-mortem donation and obtain the estate tax benefits noted above, the easement must qualify for the deduction under section 170(h) and 2031(c), and the executor must make this (irrevocable) election before the estate tax filing deadline (generally 9 months after the date of the owner’s death). Note that in this case, any land excluded from the estate will receive a carryover basis rather than a stepped-up basis, which will clearly affect gains on any future sale.

California estate planning attorneys

There is no substitute for good estate planning, particularly for owners of significant property. For guidance on conservation easements and other estate planning tools, contact the San Francisco office of Moskowitz, LLP today.

Sales and Like-Kind Exchanges of Conservation Easements

In our previous posts on conservation easements, we discussed how a landowner can donate a conservation easement to their land and retain ownership over the rest of their rights in the property, all while reducing their tax bill. Although conservation easements are usually donated, landowners also have the option to sell and/or exchange them for additional land as well as gain added tax benefits and extended land use.

Selling a conservation easement

A landowner may sell a conservation easement on their property to a qualified organization. This is often done by farmers facing an increase in property taxes - it enables them to keep their land, obtain funds from the sale, and benefit from lower property taxes as a result of a reduction in the value of the property. Owners of forestland and lakefront properties who wish to hold on to their property and not sell it for development purposes have also been known to take advantage of conservation easements. Since the ultimate tax treatment will depend upon whether the land is held as a capital asset or for use in a trade or business, a qualified tax professional should be consulted prior to any sale.

1031 exchanges of conservation easements

Under 26 U.S. Code § 1031, a landowner is entitled to trade property that is held for productive use or investment for another of comparable type and value. This also applies to conservation easements. Instead of donating a conservation easement, or selling it for cash, in a 1031 (“like kind”) exchange the landowner exchanges a conservation easement for additional property. For example, in Private Letter Ruling 9621012, the IRS permitted a taxpayer with a ranch to exchange a perpetual scenic conservation easement over a portion of his land in exchange for a new parcel of timberland property and to take advantage of the tax benefits of a like-kind exchange.

1031 exchanges are permitted so long as the following tax rules are met:

  1. The conservation easement must be purchased by a qualified organization
  2. The new property must be of comparable value to the conservation easement
  3. A qualified intermediary must handle the transaction
  4. The exchange must be completed within the requisite time frame

Conservation easement tax attorneys

The San Francisco tax attorneys at Moskowitz, LLP have extensive experience handling both 1031 exchanges and conservation easements both within and outside the State of California. To learn more about this useful tax planning and conservation tool, contact our office for a consultation.